Mutual funds add to fallen angel holdings, reports JP Morgan

High yield bond mutual funds have increased their exposure to the financial sector in the second quarter, according to a JP Morgan analysis of fund holdings. But the bank notes that mutual funds remain underweight the sector relative to its size as a proportion of the high yield universe.

Financials have become a much bigger component of high yield as a result of the downgrade of credits such as AIG and CIT. However, mutual funds have been reluctant to buy these fallen angel names. Funds’ three biggest holdings are the technology and healthcare names Sprint Nextel, Intelsat and HCA, which each account for between 2% and 2.3% of mutual fund holdings. Financials Ally Financial, CIT and AIG are in fourth to six place. Although funds are still underweight these names, they have increased their holdings in the second quarter, notes JP Morgan in its Credit Strategy Weekly Update report.